Nadav Levy Research / Teaching / CV / Contact Info
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Research Interests
Industrial Organization ,
Economics of Organization
Papers (abstracts / no abstracts)
Commitment,
Exchange Autonomy and the Boundary of the Hierarchical Firm
Journal of Law, Economics and Organization ,
Vol. 24, No. 1
click here for an earlier
(extended) working paper
Abstract: In this paper I present a theory of the
boundary of the firm that accounts for some important characteristics of
real-world multidivisional firms: operative decisions are in the hands of
middle managers who are rewarded based on the performance of their units;
managers' decisions are subject to approval and intervention by the top
management of the firm; and managers are better informed regarding the affairs
of their divisions. In this setup, the integration of an intermediate input
supplier and its buyer as separate divisions within a single firm is desirable,
as long as the choice of trading partners can be credibly delegated to the
divisions' managers. I show that this is satisfied not only under the
assumption of full commitment by the general office of the firm, but also,
remarkably, if it has no commitment power whatsoever. An explanation of the
boundary of the firm emerges only if the general office retains some limited
commitment power. I show that the general office mandates internal trades in
more instances than would have been optimal with full commitment, adversely
affecting the levels of investment undertaken by the divisions' managers. In
such cases, it can be optimal to have the trade conducted between
non-integrated parties.
Make vs. Buy Externalities and the Organization of Supplier
Networks
Latest version: 3/2006
Abstract:
I study how the make-or-buy decision of a firm depends on the organization of
its peers, in a model with multiple buyers and suppliers. Interdependencies
between different firms stems from the fact that suppliers may achieve
economies of scope by taking designs from several firms, amortizing parts of the
setup costs over a large group of clients. These savings are passed through to
the buyers, provided that they share suppliers. Because of these externalities,
the efficiency of outsourcing increases with number of outsourcing firms. In
contrast, integrated buyers are denied these benefits, as outsourcing buyers
eschew inefficient integrated suppliers. Multiple organizational equilibria are possible, the all-outsourcing equilibrium
Pareto-superior when exists and more likely in larger markets. I also characterize
the equilibrium size of supplier networks under outsourcing and show that it
increases in the size of the market and in the relative importance of the
buyer's investment.
Working Papers
Government's Credit-Rating Concerns and the Privatization
of Public Projects
Latest version: 6/2008
Abstract
: We study how considerations
regarding the credit rating of the government's debt affect privatization
policy. "Credit-market discipline" presses the government to put more
weight on the monetary aspect of public projects, relative to their social
benefits, as the anticipated income increases its creditors' confidence in its
ability to repay debt. Yet, several informational problems undermine this
discipline, leading to a costly downgrading of the credit rating. Dynamic
inconsistency occurs when the monetary to social-benefit tradeoff is made only
after the credit market has priced government's debt (such as in the decision
of the toll on a road): projects are operated with an excessive emphasis on
social benefits. Adverse selection occurs when the government has private
information regarding a prospective project's characteristics (such as
anticipated traffic). Project selection is tilted towards those with high
social benefits and low monetary benefits. We study the possible roles for
privatization to alleviate these informational problems, and evaluate the
regimes with and without the option for privatization.
Principal's experience and the authority relation
Latest version: 4/2007
Abstract: I consider how a principal's experience affects
the interaction between him and his agents. In contrast with the implications
of earlier work on authority relations, the results of this paper demonstrate
that the principal's experience does not lead to an increase in scrutiny and
can have a positive effect on the agent's performance. If experience lowers the
cost of the principal's scrutiny, and recommendations can be ascertained by the
principal, the agent improves his recommendations anticipating that a more
favorable recommendation is less likely to be overruled. Alternatively
experience can be interpreted as endowing the principal with a technical
"language" by which to communicate with the agent. Compared with the
case of an inexperienced principal with whom all communication is cheap talk, the
outcome when the principal is experienced and may receive and digest hard
information is preferred by both the principal and the agent. In equilibrium
the principal scrutinizes less and the agent's effort is higher.
On
the Informational Benefits of a Conflict over Transfer Prices
(available
upon request)
Abstract: This paper provides formal foundations to Eccles
(1985) finding that a conflict within vertically integrated firms over the
transfer price of an internally traded good, is common and even encouraged. We
show that when contracting within the firm is subject to both moral hazard and
adverse selection, it is beneficial for the firm to have each of the trading
divisions eliciting supply and purchase bids from external sources, even if internal
trade is superior. Bids collected by one of the divisions are positively
correlated with the other division's private information and allow the central
office of the firm to "tighten its control" over the division
managers, lowering their information rents and increasing their targeted
effort. We characterize the compensation required in order to induce the
division managers to search for bids and discuss the conditions under which it
may involve the central office centrally determining a transfer price of the
internally traded input contingent on the presented external information, and
compensating the divisions on their net gains.
Work in Progress
Technological cooperation
and tacit collusion
Interconnection quality as a
strategic variable: An empirical study
of Internet backbones (with Oded Bizan)
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